The SME Business Owner’s Guide to Cash Flow

Management
BY ASPIRE JANUARY 21, 2019 13 MINS READ

For small business owners with little-to-zero experience with business

finance, staying on top of your cash flow can appear to be a daunting task.
Here’s where our guide comes in: it’ll take you through the basics – starting
from defining cash flow management and other relevant key concepts, to
exploring why careful cash flow management is important, as well as the
common causes of cash flow challenges that small businesses face. We’ll
then dive deep into five key strategies that you can easily implement for
better cash flow management.
Ready? Let’s begin:
What is cash flow management?
Simply put, cash flow refers to money that is being transferred in and out of
your business. Cash flow management is thus the process of tracking and
analysing how much money is coming into and going out of your business.
This enables business owners to estimate how much cash they will have at
any point in time, create cash inflow and outflow projections and assess
when a positive or negative cash flow could occur.
Don’t mistake profitability for cash flow
There are core metrics that every small business owner should monitor,
such as the operating margin, cash burn rate, cash flow and net profit.
Among these metrics, associating cash flow with profitability is a common
area of confusion, particularly for new business owners.
It’s important to keep in mind that these are two distinct financial
parameters – and it’s not uncommon for small businesses to be in the
situation where cash flow and profits are at odds with one another. You can
be cash flow positive without being profitable, or be profitable but still be
cash flow negative.
Why is cash flow management important for small
business owners?
 Cash flow is the lifeblood of any small business: As we’ve
mentioned above, small businesses can find themselves in the situation
 where they are profitable, yet have negative cash flow. While this may
happen occasionally, even profitable companies can run into trouble if
having negative cash flow becomes a regular occurence. For example,
while you may be able to land new contracts, you won’t be able to fulfil
the agreement if you aren’t first able to meet your short term financial
obligations, such as payroll or rental expenses. Over time, missing out
on these opportunities will eventually result in significant losses for
your venture.
 Proper cash flow management is vital for the long term growth of
your business: Cash flow constraints can have far-reaching impacts on
the growth of your venture. In an SGSME article, Dev Dhiman,
managing director, Southeast Asia & Emerging Markets for Experian
advised that cash flow challenges “have the potential to hold back the
growth strategies SMEs intend to pursue during the next 12 months.”
Rigorous management of your cash flow is crucial in order to work
your way towards positive cash flow – where you’ll be in a position to
invest in long term, strategic initiatives, instead of implementing
shorter term, reactive measures.
 You’ll be better positioned to capitalise on unexpected business
opportunities: Careful cash flow management will enable you to build
up a cash buffer, or be better positioned to obtain external financing
when you require additional funds to capitalise on unexpected
business opportunities that arise. That’s because the strength of your
cash flow is one of the key factors that lenders will look at when
assessing your business loan application. To increase your chances of
getting approved, you’ll need to show that you have a healthy cash
flow, and are able to meet your payments in a timely manner even
when unforeseen expenses crop up.
Common causes of cash flow challenges
faced by small businesses
 Late payments: Delayed payments are one of the biggest financial
challenges for SMEs in Singapore. According to findings from DP
Info’s 2017 SME Development Survey, the percentage of SMEs facing
financial challenges increased from 22 percent in 2016 to 35 percent in
2017. Of these companies, the majority (81 percent) were dealing with
late payments from their customers.
  Lack of financial literacy: The lack of a background in business
finance can make it challenging for business owners to prioritise
record keeping and financial planning – particularly in the earlier
stages of running their venture, when they need to wear many hats and
juggle multiple responsibilities.
 Overestimating sales: Evaluating the potential sales of your company
can be tricky – especially for new business owners, as they won’t yet
have historical sales figures to draw insights from in order to make
more accurate sales projections. These owners run the risk of creating
an overly optimistic revenue forecast, which can lead to overspending
and cash flow problems.
 Not keeping a cash cushion: Equipment breakdowns, maintenance
repairs and a lower-than-expected sales volume are examples of
unforeseen circumstances that may crop up from time to time, and
create a cash flow crunch for your company if you haven’t built up a
cash cushion. While what’s considered a sufficient cash reserve will
differ across businesses, a general guideline is to set aside a sum that
amounts to three to six months’ worth of your operating expenses. It’s
best to consult your financial advisor or accountant to determine the
exact sum you need to set aside.
5 Strategies to better cash flow
management
Many small business owners struggle with keeping their cash flow on an
even keel. Below, we’ll delve into five strategies you can implement to
improve your cash flow, and get it back on track.
1. Stay on top of your accounts receivable
With tardy payments being one of the biggest financial challenges for SMEs,
we can’t emphasise enough about the importance of staying on top of your
accounts receivable, so as to minimise delays in receiving your payments.
The following are action steps you can implement:
Follow invoicing best practices
Even minor invoicing mistakes, such as not providing a detailed description
for a line item can result in invoice disputes – and subsequently cause
payment delays. To speed up customer payments, here are invoicing best
practices you need to have in place:
  Don’t leave out the details: Invoices with unclear descriptions or
incomplete information will require additional clarification and
communication, which further delays the time that you’ll receive your
payment. Before you send out an invoice, ensure that all necessary
details are included. Be sure to provide a detailed description for each
line item on your invoice. And if you’re sending through an invoice for a
partial payment, make sure that you’ve outlined the services that
you’ve completed, as well as the remaining balance that needs to be
paid.
 Be prompt with follow-ups: Setting up invoice reminders is a simple
way to make sure that you’re timely with following up on delayed
payments. If you fail to receive a response, don’t be afraid to send
through an email or make a phone call to remind your customers, and
let them know that you expect to be paid on time. You may consider
implementing a penalty to discourage late payments.
 Keep it simple: When it comes to your invoice design, it’s best to keep
it simple and uncomplicated. Opt for a design with a clean background,
simple layout and where your logo and contact information are clearly
displayed.
 Consider shortening your payment terms: Reduce your use of net 30
or 60 payment terms where possible. Another way to encourage your
customers to make their payments sooner is to offer a discount for
early payments.
Protect your cash flow through milestone payments and deposits
If you’re working to fulfil a large order, consider requesting for a deposit of
at least half of the total amount to be invoiced. With extended projects, it
can be helpful to structure your payments by milestones, rather than
receiving a final payment at the end of the project. In doing so, you’ll avoid
running into dangerous cash flow situations – such as when you’ve covered
the costs for a large order, yet are left waiting on late payments.
Tap into external financing solutions to turn outstanding invoices into
cash
External financing solutions like invoice factoring offers a way for
businesses to free up capital that would otherwise be tied up in outstanding
invoices for 30 days or longer. Depending on the factoring company, you
could obtain funding as soon as within a day or two from your application –
which makes this a great option if you’re in need of immediate funding.
2. Optimise your accounts payable
With the right strategies and proper planning of your payables, you’ll be
able to maximise their potential, thereby keeping your cash flow healthy.
The following are action steps you can take:
Build positive relationships with vendors and suppliers
Fostering strong relationships with your vendors and suppliers can be key
to ameliorating the problem of financing and tardy payments. According to
My Toby Koh, group managing director of Ademco Security Group, it all
“boils down to relationship-building”.
He further elaborates: “We have built a relationship with a lot of our clients
that makes it more of a partnership. Even if they tell me they need longer
credit terms for whatever reason, I know they will pay me when the time
comes. Planning becomes a lot easier.”
To foster strong business relationships with your vendors, here are some
pointers to keep in mind:
 Be timely with payments: No business owner likes to be left waiting
on late payments – so once you’ve finalised the payment terms, make
sure you stick to the agreement and are timely in meeting your
payments. If you foresee that you may have problems making your
payments on time, be proactive in reaching out to your suppliers as
early as possible to work out a solution.
 Add a personal touch: Take the time to get to know your suppliers –
get in touch via a phone conversation, visit their offices, connect
through lunch or coffee meetings and invite them to your company
events.
 Maintain effective communication: Clear, open communication is
key for building a healthy business relationship. Keep your supplier
updated with the ongoings of your company, highlight any issues or
areas of concerns as soon as possible and ensure that both parties fully
understand each other’s expectations.
Take full advantage of payment terms
If your supplier has extended a net 30 or 60 contract, do make full use of it.
Taking advantage of creditor payment terms will enable you to keep cash in
your company longer, leaving you with more cash on hand to cover
business expenses like payroll and rent.
Categorise your payments
Consider grouping your payments together into different spending
categories, such as rent, taxes, insurance, operating expenses,
miscellaneous expenses and more. There are two benefits to categorising
your payments – firstly, you’ll gain a better understanding into how
different groups of expenses add value to your business, so you can reduce
or eliminate categories that don’t create significant benefits.
Secondly, it’ll enable you to be more strategic with timing your payments.
Ask yourself: “Which of my payments are vital for my business operations,
and which are payments that I can afford to delay?” While you’ll need to be
timely with paying out rent and payroll, other expenses, such as sales
bonuses may be deferred for a reasonable period of time.
3. Keep a close watch on your cash flow
In an Inc.com article, keynote speaker and author Jim Schleckser wrote that
the most important tip he had for first-time entrepreneurs was: don’t run
out of money. While the advice may be seemingly obvious, it’s a factor
that’s often overlooked by many business owners. Schleckser explains that
entrepreneurs have a tendency of looking at their P&L first – yet he
emphasises that they need to pay as much, if not more attention to their
cash flow statement.
So if you don’t yet have a process in place for monitoring your cash flow,
here are some suggestions to get started:
 Be rigorous about updating your cash flow: Blaine Bertsch, CEO of
financial forecasting tool Dryrun suggests that small business owners
update their cash flow projections “every time something happens in
their business that affects their cash flow”. That means making an
update whenever there is new information – such as when you’re
making a payment, or when a customer tells you that a payment will be
coming in late. It’s key that you have a system in place for managing
your cash flow – whether that’s a simple excel spreadsheet, or a
financial tool like Dryrun or Xero.
 Carry out an in-depth analysis on a monthly basis: On top of
reviewing your cash flow on a weekly basis, you’ll need to set aside a
block of time each month for an in-depth assessment of your cash flow.
During the review, you’ll want to assess your overall financial position,
and look ahead at your cash flow projection for the next quarter.
 Share your cash flow plan with your team to get everyone on the
same page: Get your team involved in your monthly cash flow reviews;
 this ensures that everyone is kept on the same page, which can help
reduce unnecessary expenses and cash flow mismanagement.
4. Avoid expanding too quickly
While striving for growth, it’s important that small business owners
understand their limitations – so that they don’t wind up expanding too
quickly beyond their capabilities, thereby creating pressure on their cash
flow. This typically happens when a company is left waiting on late
payments, or are collecting smaller payments from older projects – while
simultaneously doling out payments to cover the costs of financing new
projects of a larger scale.
It’s a problem that entrepreneur Tim Berry has encountered. In an
Entrepreneur.com piece, he shared: “One of the toughest years my
company had was when we doubled sales and almost went broke. We were
building things two months in advance and getting the money from sales
six months late. Add growth to that and it can be like a Trojan horse, hiding
a problem inside a solution. Yes, of course you want to grow; we all want to
grow our businesses. But be careful because growth costs cash. It’s a matter
of working capital. The faster you grow, the more financing you need.”
5. Secure a line of credit before you need it
A business line of credit is a handy tool you can tap for better cash flow
management: it serves as a cash cushion for unforeseen expenses, and aids
seasonal businesses in balancing out their cash flow across peak and lull
periods.
When it comes to making your loan application, remember this: timing
your application right is key. Ideally, you should apply for a line of credit
when you don’t need it, as this leaves you with ample time to look around
for a financing solution with favourable loan terms. If your credit profile
isn’t in great shape, you’ll also have sufficient time to take steps towards
building up your credit score, so you can qualify for better loan terms or a
wider range of solutions when you submit your application.

https://blog.weaspire.sg/the-sme-business-owners-guide-to-cash-flow-management/